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STUDY MATERIAL

EXECUTIVE PROGRAMME

CORPORATE AND MANAGEMENT

ACCOUNTING

MODULE 2PAPER 5

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© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

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EXECUTIVE PROGRAMME CORPORATE AND MANAGEMENT ACCOUNTING

In today’s business world accounting is considered as ‘the universal language of all business’, because it is the medium for reporting financial information about a business entity to users, such as shareholders, banks and managers. A proper accounting system is essential to any business, whether big or small, in order to manage its daily functions and run it successfully. The main obligation of any business is to maximize profits, minimize losses and at the same time maintain its position as a responsible entity within the society.

So, in the current business world, everybody should have the knowledge of accounting discipline irrespective of the job one is doing. Due to the rapid advancement in business activities due to industrialization and globalization, the need for people having knowledge of accounts have increased manifold. It is impossible to survive in today’s advanced business environment without adequate knowledge of basic accountancy.

Especially all business students should have some background in accounting to understand, interpret and present the results of business. Keeping this objective in alignment, this study material is prepared to augment the basic as well as advanced understanding of students in the related aspects of Corporate and Management Accounting.

The Study Material which is divided in two parts covers in the details the concepts of Corporate Accounting in Part – I and discusses Management Accounting and Valuation in detail under Part-II.

Besides, as per the Company Secretaries Regulations, 1982, students are expected to be conversant with the amendments to the law made up to six months preceding the date of examination.

The legislative changes made upto June 30, 2020 have been incorporated in the study material. However, it may so happen that some developments might have taken place during the printing of the study material and its supply to the students. The students are therefore advised to refer e-bulletin and other publications for updation of the study material.

In the event of any doubt, students may write to the Directorate of Academics of the Institute for clarification at academics@icsi.edu.

Although due care has been taken in publishing this study material, the possibility of errors, omissions and /or discrepancies cannot be rules out. This publication is released with an understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf.

Should there be any discrepancies, errors or omissions noted in the study material, the Institute shall be obliged, if the same is brought to its notice for issue of corrigendum in the e-Bulletin ‘Student Company Secretary’.

The Institute has decided that the examination for this paper under new syllabus from December 2019 session onwards to be held in Optical Mark Recognition (OMR) format.

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EXECUTIVE PROGRAMME CORPORATE AND MANAGEMENT ACCOUNTING

Accounting helps organization in taking management decisions, formation of planning and control system. It also helps expert advice in financial reporting with formulation and implementation of organizational strategies.

A proper accounting system is essential to any business, whether big or small, in order to manage its daily functions and run it successfully. The main obligation of any business is to maximize profits, minimize losses and at the same time maintain its position as a responsible entity within the society.

So, in the current business world, everybody should have the knowledge of accounting discipline irrespective of the job one is doing. Due to the rapid advancement in business activities due to industrialization and globalization, the need for people having knowledge of accounting, especially, Corporate and Management Accounting have increased manifold in light of the rise in the magnitude of financial transactions and its complexities . Moreover, the business scene is now getting dominated by more of corporate sector than sole proprietorship form of business exposed to stringent regulatory framewok, which in turn, calls for more scientific approach towards the critical financial facets of the business. It is impossible to survive in today’s advanced business environment without adequate knowledge of basic accountancy.

Financial Accounting

External Users

Owners Investors

Government Agencies

Creditors Lenders

Accounting

Creditors Lenders

Trade Association

Cost Accounting

Management

Accounting

Internal Users

Directors & CEOs Employees

Line Manager

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Accounting Assumptions

–Money Measurement

–Business –Entity–Going Concern

–Time Period

Accounting Concepts

– Revenue Realisation– Matching– Full Disclosure– Historical Cost– Dual Aspects– Variable and Objective Evidence

Accounting Principles

Accounting Concepts

Revenue Realisation

MatchingFull DisclosureHistorical CostDual AspectsVariable and

Objective Evidence

Accounting Constraints

– Materiality – Prudence

– Consistency– Cost Benefit

Issued By Country Regulatory Body

Accounting Standards

Issued By Country Regulatory Body

The financial statements are the end products of accounting process. They are prepared following the consistent accounting concepts, principles, procedures and also the legal environment in which the business organizations operate. These statements are the outcome of the summarizing process of accounting and therefore, are the sources of information on the basis of which conclusions are drawn about the profitability, and the financial position of a company. Hence, they need to be arranged in a proper form with suitable contents so that the shareholders and other users of financial statements can easily understand and use them in their economic decisions in a meaningful way.

The objective of this subject is to make the students understand the statutory provisions regarding preparation of final accounts of companies. After going through this lesson, one should be able to – Familiarize and understand with the requirements of preparation of statement of Profit and Loss and Balance Sheet and how to form a true and fair view of the financial statements.

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Accounting as they are the components of Financial Accounting

Step 6 Adjusted Trial

Balance

Step 7 Prepare Financial

Statements

Step 8 Close Accounts

Step 9 Post Closing Trial

Balance

Step 1Analysis of Business

TransactionsStep 2

Make Journal Entries

Step 3 Post to Ledger

Accounts

Step 4 Prepare Trial

Balance

Step 5 Make Adjusting Entries

Step 6 Adjusted Trial

Balance

Step 3 Post to Ledger

Accounts

Prepare Trial

Cash flow statement is additional information to the user of financial statement. This statement exhibits cash inflows and outflows and cash equivalents. It assesses the ability of the enterprise to generate cash and utilize cash. Cash Flow Statement is one of the tools for assessing the liquidity and solvency of the enterprise.

Accounting Standards (AS) are written policy documents by expert accounting body or by government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements. The ostensible purpose of the standard-setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having an interest in the company’s economic performance. Accounting standards reduce the accounting alternatives in the presentation of financial statements within the bounds of rationality, thereby ensuing comparability of financial statements of different enterprises.

Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services. Cost in simple words means the total of all expenses. Cost is also defined as the amount of expenditure (actual or notional) incurred on or attributable to a given thing or to ascertain the cost of a given thing. Cost is a generic term and it is always advisable to qualify the word cost to show exactly what it means, e.g., prime cost and factory cost. Cost is also different from value as cost is measured in terms of money, whereas value in terms of usefulness or utility of an article. Marginal costing is a principle whereby variable costs are charged to cost units and the fixed costs attributable to the relevant period is written off in full against the contribution for that period. Marginal costing is the ascertainment of marginal cost and the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable cost.

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Management accounting is an applied discipline used in various industries. The specific functions and principles they applied vary based on the industry. Management accounting principles in banking are specialized yet do have some common fundamental concepts which are used whether the industry is manufacturing-based or service-oriented. For example, transfer pricing is a concept used in manufacturing, but is also applied in banking. It is a fundamental principle used in assigning value and revenue attribution to various business units.

Company secretaries, due to their excellence and depth of knowledge in various corporate and related laws, as well as in finance and management disciplines and due to their professional training, are entrusted with several key functions in the corporate sector. The role of a Company Secretary in different management hierarchy varies from the positions held in the organization and the functions looked after by him/her. Company Secretary’s functions encompass a wide spectrum of duties and responsibilities, which, if laid down, would be a never ending list. However, for the sake of brevity, some of the important tasks, generally entrusted to a Company Secretary and satisfactorily discharged by him/her in the Corporate world, are enumerated below.

Liaison in the Audit Process

Advice to the Board of

Directors

Compliance Officer

Role of a Company Secretary

in Corporates

Adherence to

Regulatory Guidelines

Formulation of Corporate Management

Policies

Conducting Corporate Meetings

Active Contributory to Corporate Governance

Liaison in the Audit Process

Compliance

Company Secretaries also play an important role in the process of conforming to the different statutory/regulatory requirements as prescribed by different authorities. Company Secretaries generally take part in the formulation of various corporate policies for approval by the Board of Directors. Threadbare discussions are held by the Corporate Management Team including the Company Secretary, before any policy is firmed up.

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EXECUTIVE PROGRAMMEModule 2Paper 5

CORPORATE AND MANAGEMENT ACCOUNTING (Max Marks 100)

SYLLABUS

ObjectivesPart I : To provide knowledge and understanding of the concepts, principles and practices in Corporate

Accounting and Indian and International Accounting Standards.

Part II: To acquire knowledge and understanding of the concepts, techniques and practices of management accounting and to develop skills for decision-making and to acquire knowledge of the concepts, principles and methods of valuation.

PART I CORPORATE ACCOUNTING (60 MARKS)

Detailed Contents 1. Introduction to Financial Accounting.

2. Introduction to Corporate Accounting : Records of accounts to be maintained by a company.

3. Accounting for Share Capital : Issue of Shares; Forfeiture and Reissue of Shares, Accounting Treatment of Premium, Buy-back of Shares; Redemption and Conversion; Capital Redemption Reserve, Bonus Shares; Rights Issue, ESOPs, ESPS, Sweat Equity Shares; and Underwriting; Book Building.

4. Accounting for Debentures : Accounting Treatment, Debenture Redemption Reserve, Redemption of Debentures and Conversion of Debentures into Shares. Deferred Tax.

5. Related Aspects of Company Accounts : Accounting for ESOP, Buy-back, Equity Shares with differential rights, Underwriting and Debentures.

6. Financial Statements Interpretation: Preparation and Presentation of Financial Statements; Quarterly, Halfyearly and Annual Financial Statement pursuant to Listing Regulations;Depreciation provisions and Reserves; Determination of Managerial Remuneration, Corporate Social Responsibility spend, various disclosures under the Companies Act, 2013, LODR & applicable accounting standards; Related party and segment reporting, Audit Queries; How to Read and interpret Financial Statements.

7. Consolidation of Accounts as per Companies Act, 2013 : Holding Company, Subsidiary Companies, Associate Companies and Joint Venture; Accounting Treatment and disclosures.

8. Corporate Financial Reporting : Requirements of Corporate Reporting; Recent trends in Financial Reporting.

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9. Cash Flow Statements : Preparation and their analysis.

10. Accounting Standards (AS) : Applicability, Interpretation, Scope and Compliance; International Financial Reporting Standards ; Overview of AS, AS vs. Ind AS vs. IFRS.

11. National and International Accounting Authorities.

12. Adoption, Convergence and Interpretation of International Financial Reporting Standards (IFRS) and Accounting Standards in India.

Case Studies & Practical Aspects.

PART II MANAGEMENT ACCOUNTING AND VALUATION (40 MARKS)

13. An Overview of Cost: Importance and relevance of Cost Accounting Material Cost, Labour Cost, Direct Expenses and Overheads, Cost Sheet.

14. Cost Accounting Records & Cost Audit under Companies Act, 2013.

15. Budget, Budgeting and Budgetary Control: Preparation of various types of Budgets; Budgetary Control System; Zero Based Budgeting; Performance Budgeting.

16. Ratio Analysis: Financial Analysis through Ratios.

17. Management Reporting (Management Information Systems).

18. Decision Making Tools: Marginal Costing; Transfer Pricing.

19. Valuation Principles & Framework: Conceptual Framework of Valuation, Valuation rules; Valuation of securities or financial assets; Approaches of Valuation - Assets Approach, Income Approach; Market Approach; Registered Valuer; IND AS Valuation.

20. Valuation of Shares, Business and Intangible Assets: Regulatory Valuations; Companies Act; Insolvency and Bankruptcy Code; Income Tax Act; SEBI law; FEMA and RBI guidelines.

21. Accounting for Share-Based Payments (Ind AS 102).

22. Methods of Valuation: Net Assets Valuation: Relative Valuation (Comparable Companies/Transactions); Discounted Cash Flow Valuation; Other Methods.

Case Studies & Practical Aspects.

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LESSON WISE SUMMARYCORPORATE & MANAGEMENT ACCOUNTING

1. Introduction to Financial AccountingAccounting is a very old concept – as old as money. A description of proper keeping of accounts is also found in ‘Arthashastra” written by Kautilya. However, it has developed with the passage of time to meet the requirements and challenges of ever – growing society. The modern-day accounting concept based on double entry system was originated by Luco Pacioli in Italy. Though the act of accounting is very old, in recent times it has acquired special significance because of rapidly growing economy, cut-throat competition, expanding markets and increasing production and changes in technology.

In this lesson, we will throw light on the basic concepts of accounting, types of accounts, accounting principles, conventions, concepts & accounting standards, meaning of double entry system and the rules of debit & credit on which the entire concept of accounting is based.

Accounting process involves identification and analysis of financial transactions. These transactions are recorded, classified and summarised in a systematic manner to give useful information. Thus, accounting process starts with the recording of business transactions in monetary terms, in the primary books of accounts. For recording business transactions, it is necessary that these transactions are evidenced by proper source documents like cash memoes, purchase bills, sales bills, counterfoils of cheques issued, salary slips etc. From these source documents, transactions are recorded in the books of accounts which are the first and major step in accounting. It is the basis of accounting as entire future process would depend upon this recording of transactions. In this lesson, we will know about recording transactions in primary books like Journal and other subsidiary books, posting in ledger and then preparation of trial balance.

2. Introduction to Corporate AccountingThere is no legal obligation for sole proprietorship and partnership firm to prepare final accounts, but companies have statutory obligations to keep proper books of account and to prepare its final accounts every year in the manner as prescribed in the Companies Act. Chapter IX, Sections 128 to 138 of the Companies Act, 2013 deals with the legal provisions relating to the Accounts of Companies. Final accounts of a company consist of balance sheet as at the end of the accounting period and profit and loss account for that period. Section 129 of the Companies Act, 2013 prescribes the form and contents of balance sheet and profit and loss account of a company. Balance sheet of a company shall be prepared according to Schedule III of the Companies Act, 2013.The Schedule III sets out the minimum requirements for disclosure on the face of the Balance Sheet, and the Statement of Profit and Loss (hereinafter referred to as “Financial Statements”) and Notes. Statement of Profit & Loss of a company shall be prepared according to Part II of Schedule III of the Companies Act, 2013. Section 129(1) of the Companies Act 2013, states that the financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form provided for different class or classes of companies in Schedule III.

3. Accounting for Share CapitalThe most striking feature of a company is its ownership structure. The capital in a company is divided into small shares of fixed value. The shares of a company may be equity shares or preference shares. The objective of

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this lesson is to make students aware about accounting of different aspects of share capital. After studying this lesson one should be able to:

– Understand the share capital structure in the balance sheet of a company.

– Discuss the methods and accounting procedure of issue of shares.

– Specify the accounting treatment when shares are issued at par, premium and at discount.

– Explain the meaning and accounting treatment of forfeiture of shares and reissue thereof.

– Understand the accounting procedure of buy-back of shares.

– Enumerate the steps for redemption of preference shares.

– Appreciate the purpose of issuing Right shares & Bonus shares.

– Understand the accounting treatment for ESOPs, ESPS, Sweat Equity Shares.

– Understand the meaning of underwriting.

– Familiarize with various types of underwriting.

– Distinguish between marked application and unmarked applications.

– Determine the liability of underwriters.

4. Accounting for Debentures Equity sources of financing are however not always sufficient to meet the ever growing needs of the corporate expansion and growth. Hence, corporates turn to debt financing through financial institutions, commercial banks or by issuing debt instruments either through the route of private placement or by offering the same for public subscription. Owing tax shield provided by debt instruments, the debt financing not only helps in reducing the cost of capital but also helps in designing appropriate capital structure of the company. This lesson deals with the accounting treatment of different aspects of debenture and bond especially with issue, redemption including conversion of debenture.

5. Related Aspects of Company AccountsThe objective of this lesson is to make students aware about accounting of different aspects of share capital and deals with the accounting treatment of different aspects of debenture and bond especially with issue, redemption including conversion of debenture. Understand the share capital structure in the balance sheet of a company. Discuss the methods and accounting procedure of issue of shares. Understand the accounting procedure of buy-back of shares. Understand the accounting treatment for ESOPs and ESPS. Understand the meaning of underwriting Familiarize with various types of underwriting. Distinguish between marked application and unmarked applications. Determine the liability of underwriters. State the meaning of debenture and bonds; Describe the methods for the issue of debenture for cash and for consideration other than cash; Explain the issue of debenture as a collateral security; Explain the sources and record transaction relating to redemption of debenture; Discuss the methods of redemption of debenture; Record the Sinking Fund Investment transactions; Deal with cum-interest and ex-interest, open market operations.

6. Financial Statements InterpretationFinancial statements are compilation of financial data, collected and classified in a systematic manner according to the accounting principles, to assess the financial position of an enterprise as regards to its profitability, operational efficiency, long and short – term solvency and growth potential.

Financial statements are basic and formal means through which management of an enterprise make public communication of financial information along with select quantitative details. They are structured financial representation of the financial position, performance and cash flows of an enterprise. Many users rely on

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the general purpose financial statements as the major source of financial information and therefore, financial statements should be prepared and presented in accordance with their requirement. That does not undermine the dependence of the general users on the information contents of the financial statements.

7. Consolidation of Accounts as per Companies Act, 2013A holding company is one which acquires all or a majority of the equity shares of any other company called subsidiary company in order to have control over the subsidiary company. In order to understand the financial position of holding company, consolidations of accounts become very vital. After studying this lesson you will be able to:

– Understand the concept of holding company and subsidiary company.

– Familiarize the legal requirements for preparation of final accounts of holding company.

– Prepare consolidated balance sheet and statement of profit and loss.

– Make appropriate accounting adjustments required for the preparation of consolidated balance sheet.

– Understand the concept of minority interest in consolidation of accounts.

– Appreciate the treatment of pre-acquisition profits and losses of the subsidiary company. Make adjustment regarding profit and loss on revaluation of assets of subsidiary company.

– Understand the calculation of goodwill or cost of control.

– Make adjustment for inter-company unrealized profits and inter-company transactions.

– Understand the treatment of bonus issue on consolidation of accounts.

– Make adjustment on dividend received from subsidiary company.

8. Corporate Financial Reporting Accounting is a process to identify measure and communicate economic information to form informed judgments and decisions by the user of the information. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions and related choice among alternative course of actions. Financial reporting may be defined as communication of published financial statement and related information from a business enterprise to all its users. It contains both qualitative and quantitative information.

The Financial Report made to the management is generally known as Internal Reporting, while financial reporting made to the shareholder investors/management is known as external reporting. The internal reporting is a part of management information system and uses MIS reporting for the purpose of analysis as an aid in decision making process.

The management of a corporate is ultimately responsible for the generation of accounting information. The accountability of a company has two distinct aspects – legal and social. Under legal requirements a company has to supply certain information to the various users through annual reports and under the social obligation, a company has to provide additional information to various user groups

9. Cash Flow StatementsCash flow statement is additional information to user of financial statement. This statement exhibits the flow of incoming and outgoing cash and cash equivalent. It assesses the ability of the enterprise to generate cash and utilize cash. Cash Flow Statement is one of the tools for assessing the liquidity and solvency of the enterprise.

Cash Flow Statement is considered to be a summarized statement showing sources of Cash Inflows and

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application of cash outflows of an enterprise during a particular period of time. It is prepared on the basis of the published data as disclosed by the Financial Statement of two different financial periods. It is an essential tool for managerial decision-making. Cash Flow reports the management Net Cash Flow (i.e. cash inflow less cash outflow or vice versa) from each activity of the enterprise as well as of the overall business of the enterprise. The management of the enterprise gets a picture of movement of cash resources from the Cash Flow Statement and can assess the stronger and weaker area of movement of cash for different activities of the business for drawing up the future planning.

10. Accounting Standards (AS)Accounting Standards (AS) are written policy documents by expert accounting body or by government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements. The ostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having an interest in the company’s economic performance. Accounting standards reduce the accounting alternatives in the presentation of financial statements within the bounds of rationality, thereby ensuing comparability of financial statements of different enterprises.

11. National and International Accounting AuthoritiesUnder this unit we will study various national and international accounting authorities. Under national accounting authorities will study The Institute of Company secretaries of India (ICSI), The Institute of Chartered Accountants of India (ICAI), The Institute of Cost Accountants of India. Under International Accounting authorities we will study: IFRS Foundation/ International Accounting Standards Board (IASB) , The International Public Sector Accounting Standards Board (IPSASB), Financial Reporting Council (FRC) (UK), European Financial Reporting Advisory Group (EFRAG), Financial Accounting Standards Board (FASB), American Institute of Certified Public Accountants (AICPA), Australian Accounting Standards Board (AASB), The Chartered Accountants Australia and New Zealand, Financial Reporting & Assurance Standards Canada, Canadian Institute of Chartered Accountants (CICA), Accounting Standards Board of Japan (ASBJ), External Reporting Board (XRB),New Zealand, New Zealand Institute of Chartered Accountants.

12. Adoption, Convergence and Interpretation of International Financial Reporting Standards (IFRS) and Accounting Standards in India

According to International Accounting Standard Board (IASB) conceptual framework, the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors is making decisions about providing resources to the entity. Consequently, the two important characteristics of financial information that emanates from the above objective relates to relevance and reliability. According to IASB Framework for the Preparation and Presentation of Financial Statement, information is deemed to be relevant when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting, their past evaluations.

Similarly to be reliable, information must represent faithfull the transactions and other events it either purports to represent or could reasonably be expected to represent.

13. An Overview of CostCost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services. Cost in simple, words, means the total of all expenses. Cost is also defined as the amount of expenditure (actual or notional) incurred on or attributable to a given thing or to ascertain the cost of a given thing. Thus it is that which is given or in sacrificed to obtain something. The cost of an article consists of actual outgoings or ascertained charges incurred in its production and sale. Cost is a generic term and it is

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always advisable to qualify the word cost to show exactly what it meant, e.g., prime cost, factory cost, etc. Cost is also different from value as cost is measured in terms of money whereas value in terms of usefulness or utility of an article.

14. Cost Accounting Records & Cost Audit under Companies Act, 2013Cost Audit involves an examination of cost books, cost accounts, cost statements and subsidiary and prime documents with a view to satisfying the auditor that these represent true and fair view of the cost of production. This includes the examination of the appropriateness of Cost Accounting system.

Cost Audit is an innovation introduced for the first time in the world and India with a view to regulate industries on healthy and sound lines. It is for cost-effective products and services to customers, proper revenue to government’s treasury and proper returns to other stakeholders of the enterprise. India is the first country in the world introducing the legal provisions for compulsory maintenance of cost records, so that industries become cost conscious and industrial efficiency is increased for the benefit of the society as a whole. It fully conforms to the requirements of planning for ‘sustainable development’. If an enterprise is to work effectively all its assets and liabilities must be used in the most rational manner. This means that the productive areas within the control of the enterprise, its buildings, equipment, machineries etc. must be used to the maximum and this in turn presupposes the economical expenditure of circulating assets or working capital. Efficient use of productive resources for the maximum benefit to the society is an immutable law of economic development and cost accounting system, and its audit is the most significant means of ensuring the same.

15. Budget, Budgeting and Budgetary ControlThe literary meaning of the word Budget is a statement of income and expenditure of a certain period. In principle, the meaning is same in the context of business also. An individual will have his own budget, a family, a local authority, state and country etc. All will have their respective budgets. So also the business concern must have its budget so as to attain their objectives. CIMA defines a budget as, “A budget is a financial and/or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective.”

Also provide types of budgets, meaning of budgetary control, concepts covered under the chapter and finally what students are going to learn.

16. Ratio AnalysisRatio analysis is the process of determining and interpreting numerical relationships based on financial statements. A ratio is a statistical yard stick that provides a measure of the relationship between variables or figures. This relationship can be expressed as percent (cost of goods sold as a percent of sales) or as a quotient (current assets as a certain number of times the current liabilities). As ratios are simple to calculate and easy to understand there is a tendency to employ them profusely. While such statistical calculations stimulate thinking and develop understanding there is a danger of accumulation of a mass of data that obscures rather than clarifies relationships. The financial analyst has to steer a careful course. His experience and objectives of analysis help him in determining which of the ratios are more meaningful in a given situation.

17. Management Reporting (Management Information Systems)A management information system (MIS) produces information that supports the management functions of an organisation and facilitates the decision-making process. The MIS is thus an organised approach of collecting, processing, storing and disseminating data to carry out management functions. To transform data into information, processing is needed and it must be done while considering the context of a decision. Good

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information must have the characteristics of relevance, timeliness, accuracy, cost-effectiveness, reliability, usability, and exhaustiveness. The MIS can play a critical role in the implementation of a programme in terms of monitoring periodic progress. A well designed MIS facilitates the flow of information among various levels and enables setting up of a feedback mechanism for planning and management of a programme, project or a policy. The MIS must be simple and easy to comprehend by different stakeholders of the programme at national, sub-national and community levels, and it should provide reliable information. The information should be specific, accurate and verifiable; it should facilitate timely management decision in terms of frequency and flow of information (i.e. a two-way feedback system in a decentralised framework). The information generated by the system should be easy to access, process and use; thereby enabling a wider dissemination. Also, it should be amenable to computer software.

18. Decision Making ToolsThe term ‘marginal cost’ is defined as the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit. It is a variable cost of one unit of a product or a service i.e., a cost which would be avoided if that unit was not produced or provided. Marginal costing is “the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs.” Several other terms in use like direct costing, contributory costing, variable costing, comparative costing, differential costing and incremental costing are used more or less synonymously with marginal costing.

A ‘Transfer Price’ is that notional value at which goods and services are transferred between divisions in a decentralized organisation. Transfer prices are normally set for intermediate products, which are goods, and services that are supplied by the selling division to the buying division. In large organisations, each division is treated as a ‘profit center’ as a part and parcel of decentralization. Their profitability is measured by fixation of ‘transfer price’ for inter divisional transfers.

19. Valuation Principles & FrameworkValuation is a very interesting topic. Valuation becomes very important in choosing investments for a portfolio, in deciding on the appropriate price to pay or receive in a takeover and in making investment, financing and dividend choices when running a business. The premise of valuation is that we can make reasonable estimates of value for most assets, and that the same fundamental principles determine the values of all types of assets, real as well as financial. Some assets are easier to value than others, the details of valuation vary from asset to asset, and the uncertainty associated with value estimates is different for different assets, but the core principles remain the same. The objective of this lesson is to get students aware about different aspects related to valuation of shares, goodwill, trademarks and other intangibles. After the end of this lesson, you will able to:

– Understand the different methods of valuation of shares.

– Familiarize with the concept of fair value of shares.

– Understand the procedure of valuation of preference shares.

– Understand the meaning of intangible assets.

– Evaluate the identifiability of intangible assets.

– Explain the recognition of intangible assets.

– Appreciate the acquisition of intangible assets by way of government grants.

– Understand the treatment of internally generated goodwill.

– Conceptualize the recognition of an expense on intangible assets.

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– Explain the amortization of intangible assets

– Explain the retirement and disposals of intangible assets

20. Valuation of Shares, Business and Intangible Assets: A share is the smallest unit of ownership of a company. It happens to be one of the sources by which a company raises funds from the market. The value of a share does not remain static over its life-time. Rather it changes over the period due to various circumstances. Thus, knowing the value of share at a particular point of time is of great importance.

Goodwill is an intangible fixed asset of an organisation which has to be reflected in its books of accounts on certain circumstances. For this purpose, a money value is required to be attached to this intangible asset. The process of estimating the value of goodwill using certain accepted methodologies is referred to as valuation of goodwill.

21. Accounting for Share based payments (Ind AS 102)A share-based payment is a transaction in which the entity receives goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity’s shares or other equity instruments of the entity.

Employee share-based payments are incentive payments to employees in form of shares. The expression employee share-based payments also include cash incentives to employees, the size of which is linked with value of shares. The payment in form of shares generally involve grant of options to employees to subscribe shares of employer’s enterprise at a concessional price, called the exercise price. The employees gain the excess of market price of share at the time of exercise over the specified exercise price. In case of employee share-based payments in form of cash incentive, the excess of market price on specified future date and a stated price is paid in cash. In either case, the value of incentive depends on increase in share value, which is the generally accepted indicator financial success of a business. By linking incentives with value of shares, the employee share-based payment plans effectively integrate personal goals of employees with that of the enterprise

22. Methods of ValuationWhen valuing a company as a going concern there are three main valuation methods used by industry practitioners: (1) DCF Analysis, (2) comparable company analysis, and (3) precedent transactions. These are the most common methods of valuation used in investment banking, Equity Research , Private Equity , Corporate Development, Merger & Acquisitions , Leveraged Buyouts and most areas of finance.

Comparable company analysis (also called “trading multiples” or “peer group analysis” or “equity comps” or “public market multiples”) is a relative valuation method in which you compare the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA or other ratios. Multiples of EBITDA are the most common valuation method.

Precedent transactions analysis is another form of relative valuation where you compare the company in question to other businesses that have recently been sold or acquired in the same industry. These transaction values include the take-over premium included in the price for which they were acquired.

These values represent the en bloc value of a business. They are useful for M&A transactions, but can easily become stale-dated and no longer reflective of the current market as time passes. They are less commonly used than Comps or market trading multiples.

Discounted Cash Flow (DCF) analysis is an intrinsic value approach where an analyst forecasts the business’ unlevered cash-flow into the future and discount it back to today at the firm’s Weighted Average Cost of Capital (WACC).

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A DCF analysis is performed by building a finance model in Excel and requires an extensive amount of detail and analysis. It is the most detailed of the three approaches, requires the most assumptions and often produces the highest value. However, the effort required for preparing a DCF model will also often result in the most accurate valuation. A DCF model allows the analyst to forecast value based on different scenarios, and even perform a sensitivity analysis.

For larger businesses, the DCF value is commonly a sum-of-the-parts analysis, where different business units are modeled individually and added together.

xviii

LIST OF RECOMMENDED BOOKSPAPER 5: CORPORATE AND MANAGEMENT ACCOUNTING

S. No

Title of the Book Author/(s) Volume /Edition

Publisher

1. Financial Accounting – A Management Perspective

R. Narayanaswamy 4th 2017

PHI Learning Private Limited

2. Financial Accounting for Management

Ambrish Gupta 5e 2016

Pearson

3. Advanced Accounts M.C. Shukla, T.S. Grewal & S.C. Gupta

19/e 2017 S. Chand & Company Ltd

4. Company Accounts Dr. S N Maheshwari & Dr. Suneet K Maheshwari

5/e 2017

S. Chand & Company Ltd

5. Advanced Accountancy Corporate Accounting Vol-II

S.P. Jain & K. L. Narang

21st 2017 Kalyani Publishers

6. Advanced Accountancy S. N. Maheshwari & S. K. Maheshwari

Vikas Publishing House (Pvt.) Ltd

7. Fundamentals of Corporate Accounting

J. R. Monga 2 Vol 2018

Mayoor Paperbacks

8. Corporate Accounting Goel, Maheshwari Gupta

International Publishers

9. Cost & Management Accounting

Ravi M. Kishore 6th Taxmann

10. Advanced Management Accounting

Rajesh Makkar 2 Vol

11. Students’ Guide to Accounting Standards

D S Rawat 32nd Taxmann

(Note: Students are advised to refer to the latest edition of the publication.)

xix

ARRANGEMENT OF STUDY LESSONS

Module-2 Paper-5Corporate and Management Accounting

Sr. No. Lesson Title

Part I : Corporate Accounting

1. Introduction to Financial Accounting

2. Introduction to Corporate Accounting

3. Accounting for Share Capital

4. Accounting for Debentures

5. Related Aspects of Company Accounts

6. Financial Statements Interpretation

7. Consolidation of Accounts as per Companies Act, 2013

8. Corporate Financial Reporting

9. Cash Flow Statements

10. Accounting Standards (AS)

11. National And International Accounting Authorities

12. Adoption, Convergence and Interpretation of International Financial Reporting Standards (IFRS) and Accounting Standards In India.

Part II : Management Accounting and Valuation

13. An Overview of Cost

14. Cost Accounting Records & Cost Audit Under Companies Act, 2013

15. Budget, Budgeting and Budgetary Control

16. Ratio Analysis

17. Management Reporting (Management Information Systems)

18. Decision-Making Tools

19. Valuation Principles & Framework

20. Valuation of Shares, Business And Intangible Assets

21. Accounting for Share-Based Payments (Ind AS 102)

22. Methods of Valuation

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CONTENTS

LESSON 1

INTRODUCTION TO FINANCIAL ACCOUNTING

Introduction 2

Objectives of Accounting 3

Function of Accounting 3

Book-Keeping 4

Accounting Cycle 5

Steps/Phases of Accounting Cycle 5

Basic Accounting Terms 5

Double Entry System 9

Features of Double Entry System 9

Advantages of Double Entry System 9

Limitations of Double Entry System 9

The Concepts of ‘Account’, ‘Debit’ and ‘Credit’ 10

The Concept of Account 10

Types of Accounts 10

The Accounting Process 11

Accounting Equation 11

Double Entry System, Books of Prime Entry, Subsidiary Books 12

Books of Prime Entry 12

Functions of Journal 12

Advantages of Journal 12

Explanation of Journal 12

Sub-division of Journals 13

Importance of Sub-division of Journal 14

Compound Journal 14

Subsidiary Books 14

Recording of Cash and Bank Transactions 15

Types of Cash Book 15

Is the Cash Book a Journal or a Ledger? 16

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Purchase Day Book 17

Sales Day Book 17

Journal Proper 18

Ledger Accounts 18

Ledger Posting 18

Posting to Ledger Accounts from Subsidiary Books 19

Typical Ledger Account Balances 19

Closing Balance and Opening Balance 20

Sub-divisions of Ledger 20

Advantages of sub-division of Ledger: 21

Trial Balance 21

Features of a Trial Balance 22

Preparation of Trial Balance 22

Purpose of a Trial Balance 22

Is Trial Balance Indispensable? 23

Forms of a Trial Balance 23

Method of Preparation 23

Summary of Rules 24

Trial Balance – Utility and Interpretation 24

LESSON ROUND-UP 25

TEST YOURSELF 26

LESSON 2

INTRODUCTION TO CORPORATE ACCOUNTING

Introduction 30

Preparation and Presentation of Financial Statements 30

Schedule III of the Companies Act, 2013 31

General Instructions for the preparation of Balance Sheet and Profit and Loss Account 32

Presentation of Balance Sheet 33

Part-I – Form of Balance Sheet 34

Disclosure Requirement: Schedules Forming Part of Financial Statements/Annual Report 36

Part II-Form of Statement of Profit And Loss 54

General Instructions for preparation of Statement of Profit and Loss 55

True and Fair View of Financial Statements 58

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LESSON ROUND-UP 59

TEST YOURSELF 59

LESSON 3

ACCOUNTING FOR SHARE CAPITAL

Meaning of Shares 64

Meaning of Share Capital 64

Kinds of Share Capital 64

Types/Classes of Preference Shares 66

Disclosure of Share Capital 66

Procedure for Issue of Shares 67

Terms of Issue of Share 67

Issue of Shares At Par 67

Issue of Shares At Premium 70

Accounting Treatment of the Issue of Shares At Premium 71

Issue of Shares At Discount 71

Subscription 72

Calls-in-Advance and Interest on Calls-in-Advance 73

Interest on Calls-in-Advance 74

Calls-in-Arrear and Interest on Calls-in-Arrear 75

Issue of Shares for Consideration other than Cash 75

Forfeiture of Shares 76

Procedure for Forfeiture of Shares 77

Accounting Treatment as per below cases 77

Reissue of Forfeited Shares 81

Re-Issue Of Forfeited Shares - At a Premium 81

Buy-Back of Shares 85

Transfer of Certain Sums to Capital Redemption Reserves Account (Section 69) 89

Prohibition on Buy-Back in Following Circumstances: (Section 70) 89

Companies (Share Capital and Debentures) Rules, 2014 90

Issue of Bonus Shares 98

Issue & its related conditions 98

Employee Stock Option Scheme (ESOP) 99

Issue of Sweat Equity Shares 104

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Definition 104

Conditions to be fulfilled 104

Quantum of sweat equity share 104

Pricing of sweat equity share 105

Procedure for issue of sweat equity share 105

Disclosure in the directors’ report in respect of sweat equity share 106

Accounting treatment of sweat equity share issued 106

Issue of Right Shares 107

Issue and Redemption of Preference Shares 107

Issue of preference shares 107

Redemption of preference shares 108

Capital Redemption Reserve Account 108

Premium on redemption of preference shares 108

Underwriting of Shares 113

LESSON ROUND UP 121

TEST YOURSELF 122

LESSON 4

ACCOUNTING FOR DEBENTURES

Introduction 124

Debentures 124

Kinds of Debentures 124

Issue of Debentures 125

Conditions for issue of debentures as per Companies Act, 2013 126

Difference between debentures and shares: 126

Issue of debentures for cash 126

Issue of debentures at premium 129

Issue of debentures at discount 130

Issue of Debentures for Consideration Other Than Cash 132

Debentures Issued As a Collateral Security 133

Accounting Treatment of Collateral Security 134

Debenture Interest 135

Interest accrued and due (outstanding interest) 137

Interest accrued but not due (accrued interest) 137

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Accounting entries for issue of debentures (based on conditions of redemption) 138

Treatment of Discount/Loss on the Issue Of Debentures 140

Redemption of Debentures 141

Sources of Redemption 142

Debenture Redemption Reserve (DRR) 144

Accounting Treatment 145

Sinking Fund Method (Debenture Redemption Fund Method) 146

Cumulative Sinking Fund 146

Non-Cumulative Sinking Fund 148

Insurance Policy Method 149

Accounting Treatment 149

Redemption by Conversion 151

Purchase of Debentures in the Open Market 153

Purchase of Debentures before the Specified Date of Payment of Interest [Cum-Interest and Ex-Interest Quotations] 156

LESSON ROUND UP 159

TEST YOURSELF 160

LESSON 5

RELATED ASPECTS OF COMPANY ACCOUNTS

Buy-Back of Shares 165

Transfer of certain sums to capital redemption reserves account (Section 69) 168

Prohibition on buy-back in following circumstances (Section 70) 168

SEBI (Buy-back of Securities) Regulations, 2018 168

Modes of buy-back 168

Disclosures, filing requirements and timelines for public announcement and draft letter of offer 168

Additional Conditions for Buyback of Shares or Other Securities 169

Escrow account 169

Advantages of Buy-Back 170

Accounting for Buy-Back 170

Debentures-Issue and Redemption 171

Introduction 171

Requirement 171

Differences between Shares and Debentures 171

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Accounting for Debentures 172

Issue of Secured Debenture 173

Accounting Aspects of Issue debentures 174

Issue for Consideration other than Cash 175

Debentures issued as Collateral Security 175

Discount on the issue of Debenture 175

Redemption of Debentures 175

Creation of Debenture Redemption Reserve (DRR) Account 176

Methods of Redemption Of Debentures 177

Option Scheme 177

Employee Stock Option Plan (ESOP), Employees Stock Option Scheme (ESOS) 177

Issue of Employee Stock Options 177

Employees Stock Option Scheme (ESOS) 181

Equity Shares with Differential Rights 182

Explanatory Statement Annexed to Notice 183

Underwriting Of Shares 184

Underwriting Agreement 185

Sub-Underwriters 186

Underwriting Commission 186

Full and Partial Underwriting 186

Accounting entries 186

Determination of Liability in respect of Underwriting Contract 187

LESSON ROUND-UP 188

TEST YOURSELF 190

LESSON 6

FINANCIAL STATEMENTS INTERPRETATION

Introduction 194

Financial Statements 194

How are Financial Statements Prepared 195

Who Issues Financial Statements? 195

Different Types of Financial Statements 195

Interim Statements 195

Annual Statements 195

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Who Uses Financial Statements and What Are They Used For? 195

Financial statement template and form 196

Presentation of Financial Statement (Ind AS-1) 196

Ind AS 1, Presentation of Financial Statements 196

Financial Statements 197

Structure and Content 197

Other Comprehensive Income 198

Current/non-current distinction 198

How to Read and Interpret Financial Statements 199

Types of Financial Statements: 199

Objectives of Financial Statements: 199

Treatment of Special Items during Financial Statements Preparation 201

Depreciation Provisions& Reserves 201

Meaning and Nature of Depreciation: 201

Need or objectives of providing Depreciation 201

Methods of providing depreciation 202

Determination of Managerial Remuneration 206

Remuneration allowed to Managerial personnel 206

Manner of Determination of Managerial Remuneration 208

Maximum amount of Sitting Fees 208

Method of Payment of Managerial remuneration 209

Remuneration not allowed to Independent Directors 209

Recovery of Remuneration received by director in contravention of section 197 of the Companies Act, 2013 209

Fine in case of contravention of provisions of section 197 209

Corporate Social Responsibility Spend 209

Role of Board of Directors 209

CSR Expenditure 210

CSR Reporting 210

Related Party Disclosure 211

Fine for Contravention 212

Related party disclosure according to AS 18 212

Segment Reporting (AS 17) 212

Scope 213

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Audit Query 214

LESSON ROUND UP 215

TEST YOURSELF 216

LESSON 7

CONSOLIDATION OF ACCOUNTS AS PER COMPANIES ACT, 2013

Introduction 220

Holding Company 220

Subsidiary Company 220

Company Includes Body Corporate 220

Share-Holding of Holding Company by Subsidiary Company 220

Associate company 221

Wholly Owned Subsidiary Company 221

Partly Owned Subsidiary Company 221

Minority Shareholder 221

Legal Requirements for a Holding Company 221

Consolidated Financial Statements 222

Contents and Format of Consolidated Balance Sheet 223

Minority Interest 226

Consolidated Profit & Loss Account 228

Goodwill 231

Pre-acquisition and post-acquisition Profits/Reserves 235

Elimination of inter-company balances and amounts 239

Bonus Shares Issued by Subsidiary Company 246

Dividend 248

Goodwill (Goodwill Appearing in the Balance Sheet of Subsidiary Company) 251

LESSON ROUND UP 255

TEST YOURSELF 256

LESSON 8

CORPORATE FINANCIAL REPORTING

Introduction 260

Need for Corporate Reporting 260

Disclosure of Significant Accounting Policies 260

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Features of Corporate Financial Reporting 261

Recent trends in Corporate Financial Reporting 261

Why Corporate Financial Reporting? 261

Auditors Report 262

Requirements of the Companies Act, 2013 262

Boards’ Report 265

Company Auditor’s Report Order (CARO), 2016 – Reporting Requirements 267

Companies (Auditor’s Report) Order, 2020 271

Corporate Governance 275

Definitions of Corporate Governance 275

Need of Corporate governance 276

Corporate Governance under Companies Act, 2013 276

Corporate Governance Report 278

Value Added Statement 282

Introduction 282

Definition and Background of Value-Added and the Value-Added Statement (VAS) 282

Distribution of Gross Value Addition 283

Value-Added Statement 283

Limitation of Value-Added Statement 283

Difference between Value Added And Profit 284

Format of Value Added Statement 284

Extracts of Value-Added Statement Infosys Annual Report 2011-12 285

Extracts of Value Added Statement of Bharat Petroleum Corporation Limited 2010-2011 286

Economic Value Added 286

How to Calculate Economic Value-Added (EVA) 287

What insight does EVA provide about financial performance of a business? 288

Corrective Action to Improve EVA 289

Advantages of EVA Analysis 289

Market Value Added 289

Market Value-Added = Company’s total Market Value – Capital Invested 289

Shareholder Value Added (SVA) 290

Advantages of Adopting SVA 291

Limitations of Adopting SVA 291

LESSON ROUND UP 291

TEST YOURSELF 292

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LESSON 9

CASH FLOW STATEMENT

Introduction to Cash Flow Statement 294

Applicability of AS-3 Cash Flow Statements 294

Meaning of certain terms used in the context of cash Flow Statement 294

Sources of Cash 295

Internal Sources 295

External Sources 295

Classification of Cash Flows Statement 296

Special Items 297

Preparation of A Cash Flow Statement 299

Reporting Of Cash Flows from Operating Activities 300

Direct Method 300

Indirect Method 302

Format of Cash Flow Statement 304

Fund Flow Statement 316

Difference between Cash Flow Analysis and Funds Flow Analysis 316

Utility of Cash Flow Analysis 317

Limitations of Cash Flow Analysis 318

LESSON ROUND-UP 318

TEST YOURSELF 319

LESSON 10

ACCOUNTING STANDARDS (AS)

Meaning of Accounting Standards 326

Applicability of Accounting Standards 327

Standards Setting Process 327

Accounting Standard and Auditors 328

Accounting Standard and Board’s Report 328

Benefits and Limitations 328

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Advantages of Accounting Standards 328

Disadvantages of Accounting Standards 329

How many Accounting Standards? 329

List of Accounting Standards as issued by ICAI 330

Applicability of Accounting Standards 331

Requirement to follow Accounting Standards 333

Applicability of Accounting Standards for Companies 333

Applicability of Ind AS to specified companies 334

Need For Convergence with International Financial Reporting Standards (IFRS) 341

International Accounting Standard board 342

International Financial Reporting Standards (IFRS) as Global Standards 342

Convergence with IFRS in India 343

Why IFRS ? 343

Indian GAAP (IGAAP) 344

Differences (IFRS Vs IGAAP) 344

List of IFRS 345

LESSON ROUND UP 347

TEST YOURSELF 347

LESSON 11

NATIONAL AND INTERNATIONAL ACCOUNTING AUTHORITIES

The Institute Of Chartered Accountants of India 350

The Institute Of Cost Accountants of India 350

IFRS foundation 351

The IFRS Foundation’s three-tier structure 351

Trustees of the IFRS Foundation (Trustees) 351

IFRS Advisory Council (Advisory Council) 352

International Public Sector Accounting Standards Board (IPSASB) 353

Financial Reporting Council (FRC) (UK) 354

European Financial Reporting Advisory Group (EFRAG) 354

Role of the EFRAG General Assembly 355

Financial Accounting Standards Board (FASB) 355

American Institute Of Certified Public Accountants (AICPA) 356

Australian Accounting Standards Board (AASB) 357

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AASB Board 358

Chartered Accountants Australia and New Zealand (CA ANZ) 358

Financial Reporting & Assurance Standards Canada (FRAS Canada) 358

Canadian Institute Of Chartered Accountants (CICA) 359

Accounting Standards Board of Japan (ASBJ) 359

External Reporting Board (XRB), New Zealand 359

LESSON ROUND UP 360

TEST YOURSELF 360

LESSON 12

ADOPTION, CONVERGENCE AND INTERPRETATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AND ACCOUNTING STANDARDS IN INDIA

Introduction 364

Applicability of Indian Accounting Standards 364

Details of Ind AS 366

Ind AS 41 Agriculture 374

Comparison of Indian GAAP, IFRS and Ind AS 375

Statement of Cash Flows 376

Accounting Policies Changes in Accounting Estimates and Errors 378

Comparison of Ind AS with IFRS (International Accounting Standards) 378

No significant differences 378

Income Taxes 378

Property Plant and Equipment 379

Leases 379

Revenue 381

Employee Benefits 382

Accounting for Government Grants and Disclosure of Government Assistance 383

The Effects of Change in Foreign Exchange Rates 383

Borrowing Costs 384

Related Party Disclosures 384

Consolidated and Separate Financial Statements 384

Investment in Associates 385

Financial Instruments Presentation 385

Earnings Per Share 386

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Interim Financial Reporting 386

Impairment of Assets 387

Provisions, Contingent Liabilities and Contingent Assets 387

Intangible Assets 387

Business Combinations 388

Non-Current Assets Held for Sale and Discontinued Operations 389

Financial Instruments : Disclosures 389

Operating Segments 389

LESSON ROUND UP 390

TEST YOURSELF 390

LESSON 13

OVERVIEW OF COST

Concepts of Cost 394

Cost 394

Costing, Cost Accounting and Cost Accountancy 394

Costing 394

Cost Accounting 395

Cost Accountancy 395

Cost Units 395

Cost Centres 396

Cost Centres in a manufacturing concern 396

Cost Objects 396

Cost Drivers 396

Cost Control 396

Cost Reduction 396

Importance & Relevance of Cost Accounting 396

Objectives of Cost & Management Accounting 398

Scope of Cost & Management Accounting 399

Limitations of Cost Accounting 399

Factors to be considered before Installation of a Cost Accounting System 400

Elements of Cost 400

Material Cost 402

Aspects of Material Control 403

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Objectives of Material Control 403

Essentials of Material Control 403

Labour Cost 404

Classification of Labour Cost 404

Accounting and Control of Labour Cost 405

Time Recording 406

Time-Keeping 406

Time-Booking 407

Expenses 407

Direct Expenses 407

Accounting Treatment of Direct Expenses 408

Control of Direct Expenses 408

Indirect Expenses 408

Expenses excluded from costs 408

Notional Expenses 409

Accounting Treatment of Indirect Expenses 409

Overheads 409

Collection of Overheads 409

Classification of Overheads 410

Functional Analysis 410

Behavioural Analysis 411

Cost Sheet 411

Preparation of Cost Sheet 411

LESSON ROUND UP 413

TEST YOURSELF 414

LESSON 14

COST ACCOUNTING RECORDS & COST AUDIT UNDER COMPANIES ACT, 2013

Introduction 416

Rule 1: Short Title and Commencement 416

Rule 2: Definitions 416

Cost Record 416

Rule 3: Application of Cost Records 417

Companies Engaged in the Production of following Goods or providing following Services : 417

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(A) Companies Engaged in Strategic Sectors 417

(B) Companies Engaged in an Industry Regulated by a Sectoral Regulator or a Ministry or Department of Central Government 418

(C) Other Companies 418

Rule 4: Applicability for Cost Audit 419

Rule 5: Maintenance of Cost Records 420

Rule 6: Cost Audit 421

Purpose of Cost Audit 422

Social Purposes of Cost Audit 423

CRA-1: Forms in Which Cost Records Shall Be Maintained 423

CRA-3: Form of Cost Audit Report 425

Annexure to Cost Audit Report 425

CRA-4: Form For Filing Cost Audit Report With The Central Government 425

LESSON ROUND UP 426

TEST YOURSELF 427

LESSON 15

BUDGET, BUDGETING AND BUDGETARY CONTROL

Budget 430

Essentials of Budget 430

Forecast and Budget 430

Budgeting 431

Budgetary Control 431

Objectives of Budgetary Control 431

Advantages of Budgetary Control 432

Limitations of Budgetary Control 432

Steps in Budgetary Control 432

Examples of Principal Budget Factors (or key Factors) 435

Preparation & Monitoring Of Various Types Of Budgets 436

Types of Budgets 437

Functional Budgets 437

The Final or Master Budget 445

Fixed Budgets 445

Flexible Budgets 445

xxxv

Preparation of Flexible Budget 446

Basic Budgets 451

Current Budget 451

Long-Term Budgets 451

Short-Term Budget 452

Zero-Base Budgeting 452

Performance Budgeting 453

Budget Variance 454

Importance of Budget Variance Analysis 455

Limitations of Budget Variance Analysis 455

LESSON SUM UP 455

TEST YOURSELF 456

LESSON 16

RATIO ANALYSIS

Introduction 460

Financial Statement Analysis 460

Objective of Financial Statement Analysis 460

Need For Financial Statement Analysis 460

Users of Financial Statements 461

Techniques/Sources of Financial Statement Analysis 461

Comparative Statements 462

Common Size Statement 462

Trend Analysis/ Ratios 462

Fund Flow Analysis 462

Cash Flow Analysis 463

Ratio Analysis 463

Objectives of Ratio Analysis 463

Advantages of Ratio Analysis 463

Limitations of Ratio Analysis 464

Classification of Ratios 465

Functional Classification 465

Financial Ratios 466

Short-Term Solvency Ratios/Liquidity Ratios 466

xxxvi

Long-Term Solvency Ratios 466

Profitability Ratios 468

Market Test Ratios 469

Turnover Ratios 470

LESSON ROUND UP 480

TEST YOURSELF 480

LESSON 17

MANAGEMENT REPORTING (MANAGEMENT INFORMATION SYSTEMS)

Introduction 486

Importance of Reporting 486

Level of Management and Reporting 486

Meaning of Management Reporting 488

The Need for Management Reporting 488

Challenges in Management Reporting systems 488

Essential Components to Management Reporting 489

Developing a Successful Management Reporting Programme 489

General Principles of Report Presentation 490

Forms of Presentation of Information 491

Attributes of Information 491

Classification of reports 491

Forms of Reporting 491

Frequency of Reporting 492

LESSON ROUND UP 493

TEST YOURSELF 493

LESSON 18

DECISION MAKING TOOLS

Marginal Costing 496

Features of Marginal Costing 496

Formulas Used in Marginal Costing 496

Meaning of Contribution 496

Contribution and Profit: Distinction 497

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Advantages of Marginal Costing 497

Limitations Of Marginal Costing 498

Cost-Volume-Profit Analysis 498

Cost-Volume-Profit (CVP) Analysis 499

Techniques of CVP Analysis 499

Cost Behaviour and CVP Analysis 499

Marginal Cost Equation 500

Contribution Margin Analysis 500

The Break Even Analysis 501

Profit-Volume Ratio 503

Significance of Profit-Volume (P/V) Ratio 504

Margin of Safety 504

Applications of CVP Analysis 508

Practical Applications of Marginal Costing 510

Key or Limiting Factor Analysis 510

Profit Planning 511

Selection of Profitable Product Mix 511

Make or Buy Decisions 511

Introduction of a New Product 511

Discontinuance to a Product or Closure of a Department 512

Accept or Reject Special Offer and Subcontracting 512

Planning of Activity Level 512

Market Expansion 512

Temporary Cessation of Operations 513

Absorption Costing 513

System of Profit Reporting 513

Stock Valuation 514

Income Determination under Marginal Costing and Absorption Costing 514

Format of Income Statement (Absorption Costing) 514

Absorption Costing and Marginal Costing: Distinction 515

Impact of Inflation on Holding of Large Inventories 515

Behavioural Considerations in Absorption Costing 516

Limiting or Key Factor 519

Transfer Pricing 523

xxxviii

Objectives of Transfer Pricing 524

Transfer Pricing Methods 524

Activity-Based Costing 527

Introduction 527

Meaning of Activity Based Costing (ABC) 528

Basics of ABC 528

Evolution of activity based costing system 529

Objectives of Activity Based Costing 530

Terminology of Activity Based Costing 530

Stages in Developing Activity Based Costing System 531

Different Types of Activities 532

Identification of activities for ABC 532

Importance of Activity Based Costing (ABC) 533

Uses of Activity Based Costing 534

Limitations of Activity Based Costing 534

LESSON ROUND-UP 539

TEST YOURSELF 541

LESSON 19

VALUATION, PRINCIPLES AND FRAMEWORK

Introduction 544

Areas where Valuation is Used 544

Generally Acceptable Methodologies of Valuation 545

Conceptual framework of valuation 545

Approaches of valuation 547

Marginal Cost of Capital 556

Market based approach 559

Indian Accounting Standard (Ind AS) 563

Procedures for Issuing Accounting Standards 563

Ind AS for valuation 564

Ind AS 33- Earnings per share 564

Ind AS 32 Financial Instrument Presentation 566

What is Financial Instrument? 566

Scope 566

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Presentations 566

Puttable Instruments 566

Settlement with Entity’s Own Shares 567

Contingent Settlement Provisions 567

Interest, Dividends, Gains and Losses 567

Offsetting a Financial Asset and a Financial Liability 567

Ind AS 113 - Fair Value Measurement 568

Objectives 568

Scope 568

Exclusion 568

Fair Value Measurement 568

Principal Market Vs Most Advantageous Market 568

Fair Value Measurement – Fair Value Hierarchy 569

Disclosures In Financial Statements 569

LESSON ROUND UP 570

TEST YOURSELF 570

LESSON 20

VALUATION OF SHARES, BUSINESS AND INTANGIBLE ASSETS

Need for Valuation 574

Factors Affecting Valuation of Shares 574

Methods of valuation of shares 574

Fair value of shares 578

Valuation of preference shares 578

Valuation of business 584

Three Business Valuation Methods 584

Valuation of intangible assets 585

Intangible Assets 585

Recognition and Initial Measurement of an Intangible Asset 586

Acquisition of Intangible Assets as Part of an Amalgamation 586

Amortization of Intangible Assets 586

Recoverability of the Carrying Amount – Impairment Losses 586

Meaning of goodwill 587

Internally Generated Goodwill 588

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Methods of valuing goodwill 588

Valuation Guidelines-Regulatory Requirements 594

Valuation guidelines prescribed by The Companies Act, 2013 594

Valuation guidelines under SEBI 596

Valuation under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 596

Valuation and issue of Sweat Equity Shares 597

Valuation of Stock Options under the SEBI (ESOP) Guidelines 597

Valuation of Shares under the SEBI (Delisting of Securities) Guidelines 598

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018– Chapter V and Schedule XX 599

Applicability of the regulations 599

Preferential Issue 599

Valuation under Income Tax Act, 1961 601

New Valuation Guidelines (Rule 11UAA of Income Tax Rules, 1962) 601

LESSON ROUND UP 602

TEST YOURSELF 603

LESSON 21

ACCOUNTING FOR SHARE BASED PAYMENTS (IND AS 102)

Objective 606

What Is Share Based Payment (SBP) Transaction &Arrangement ? 606

Example of Share-Based Payment Arrangements 606

Scope 606

Important Concepts of Accounting for Share-based payments 607

Date of Receipt of Goods and Services 608

Important Concepts of Accounting for Share-Based Payments 608

Timeline of A Share Option Award 609

Overview of Equity And Cash Settled - Measurement 610

Recognition Principle 610

Examples of impact of various conditions 611

Example - Cash-settled awards 611

Share-Based Payment Awards with a Cash Alternative 612

Modification, Cancellation or Settlement 612

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Comparison between Ind AS 102 and ICAI Guidance Note on ESOPs 615

LESSON ROUND UP 618

TEST YOURSELF 618

LESSON 22

METHODS OF VALUATION

Introduction 620

Methods of valuation 620

Discounted Cash Flow Model (DCF) 620

Asset Approach 622

Earning-Based Model 623

Capitalization of Earning Method 623

Price Earning (P/E) Ratio method 623

Measuring Cost of Equity 624

Capital Asset Pricing Model (CAPM) 624

Systematic Risk or Non-Diversifiable Risk 625

Unsystematic Risk or Diversifiable Risk 625

Assumptions of CAPM 625

Uses of CAPM 626

Limitations of CAPM 626

Current Validity of CAPM 627

β: An Indicator of Systematic Risk 627

Arbitrage Pricing Theory 630

Effect of Arbitrage on The Price 631

Arbitrage Pricing Theory Assumptions 631

Arbitrage Pricing Theory Benefits 632

Arbitrage Pricing Theory Limitations 632

Comparison Between the CAPM and the APT 632

Economic Value Added 633

How to Calculate Economic Value Added (EVA) 633

What insight does EVA provide about financial performance of a business? 635

Corrective action to improve EVA 635

Advantages of Eva Analysis 636

Market Value Added 636

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Shareholder Value Added (SVA) 637

Benefits of Adopting SVA 637

Drawbacks of Adopting SVA 637

Equity Valuation Multiples 638

Fair Market Value (FMV) 642

LEARNING ROUND UP 644

TEST YOURSELF 645

TEST PAPER 648

Lesson 1

Introduction to Financial AccountingLESSON OUTLINE

– Introduction

– Single Entry System

– Double Entry System

– The Concepts of ‘Account’, ‘Debit’ and

– ‘Credit’. Kinds of Accounts

– The Accounting Process

– Accounting Equation

– Books of Prime Entry

– Subsidiary Books

– Ledger Accounts

– Trial Balance

– LESSON ROUND UP

– TEST YOURSELF

LEARNING OBJECTIVES

In today’s business world, accounting is considered as ‘the universal language of business’, because it is the vehicle for reporting financial information about a business entity to users, such as shareholders and managers. A proper accounting system is essential to any business, whether big or small, in order to manage its daily functions, and to run it successfully. The main obligation of any business is to maximize profits, minimize losses and at the same time maintain its position as a responsible entity within the society.

Especially all business students should have some background in accounting to understand and interpret and present the outcomes of any business.

Accounting is a very old concept – as old as money. A description of proper keeping of accounts is also found in ‘‘Arthashastra” written by Kautilya. However, it has developed with the passage of time to meet the requirements and challenges of ever growing society. The modern day accounting concept based on double entry system was originated by Luco Pacioli in Italy. Though the act of accounting is very old, in recent times it has acquired special significance because of rapidly growing economy, cut-throat competition, expanding markets, rapid increasing production and changes in technology.

In this lesson, we will throw light on the basic concepts of accounting, kinds of accounts, accounting principles, conventions, concepts and standard, meaning of double entry system, and the rules of debit and credit on which the entire concept of accounting is based.

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INTRODUCTION Business is an economic activity undertaken with the motive of earning profits and maximizing of the wealth for owners. No business can run in isolation. Largely, the business activity is carried out by people coming together with a purpose to serve a common cause. This team is often referred to as an organization, which could be in different form such as sole proprietorship, partnership, corporate body, etc. The rules of any business are based on general principles of trade, social values, and statutory framework encompassing national or international boundaries. While these variables could be different for different businesses, different countries etc., the basic purpose is to add value to a product or service to satisfy customer’s demand.

The business activities require resources (which are limited and have multiple uses) primarily in terms of material, labour, machineries, factories and other services. The success of a business depends on how efficiently and effectively these resources are managed. Therefore, there is a need to ensure that the businessman tracks the use of these resources. The resources are not free, and thus one must be careful to keep an eye on the cost of acquiring them as well. As the basic purpose of business is to make profit, one must keep an ongoing track of the activities undertaken in course of business. Two basic questions would have to be answered:

(a) What is the result of any business operations? This will be answered by finding out whether it has made profit or loss?

(b) What is the position of the resources acquired and used for business purposes? How are these resources financed? Where do the funds come from?

The answers to these questions are to be found continuously, and the best way to find them is to record all the business activities. Recording of business activities has to be done in a scientific manner so that they reveal the correct outcome. The science of book-keeping and accounting provides an effective solution. It is a branch of social sciences. This study material aims at giving a platform to the students to understand basic principles and concepts, which can be applied to accurately measure the performance of a business. After studying the various chapters included herein, the student should be able to apply the principles, rules, conventions and practices to different business situations like, trading, manufacturing or services.

Definition The definition given by the American Institute of Certified Public Accountants (‘AICPA’) clearly brings out the meaning of accounting. According to it, accounting is “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof”. The definition brings out the following as attributes of accounting :

(i) Accounting is an art. Accounting is classified as an art, as it helps us in attaining our aim of ascertaining the financial results, that is, operating profit and financial position through analysis and interpretation of financial data which requires special knowledge, experience and judgment.

(ii) It involves recording, classifying and summarizing. Recording means systematically writing down the transactions and events in account books soon after their occurrence. Classifying is the process of grouping transactions or entries of the same type at one place. This is done by opening accounts in a book called ledger. Summarizing involves the preparation of reports and statements from the classified data (ledger), understandable and useful to management and other interested parties. This involves preparation of final accounts namely profit and loss account and balance sheet.

(iii) It records transactions in terms of money. All transactions are recorded in terms of common measure i.e. money which increases the understanding of the state of affairs of the business.

(iv) It records only those transactions and events which are of financial character. If an event has no

Lesson 1 n Introduction to Financial Accounting 3

financial character then it will not be capable of being measured in terms of money ; it will not be, therefore, recorded.

(v) It is the art of interpreting the results of operations to determine the financial position of the enterprise, the progress it has made and how well it is getting along.

OBJECTIVES OF ACCOUNTING • Providing Information to the Users for Rational Decision-making

The primary objective of accounting is to provide useful information for decision-making to stakeholders such as owners, management, creditors and investors. Various outcomes of business activities such as costs, prices, sales volume, value under ownership and return on investment are measured in the accounting process. All these accounting measurements are used by stakeholders (owners, investors, creditors/bankers, etc.) in course of a business operation. Hence, accounting is identified as the language of a business.

• Systematic Recording of Transactions

To ensure reliability and precision for the accounting measurements, it is necessary to keep a systematic record of all financial transactions of a business enterprise which is ensured by book-keeping. These financial records are classified, summarized and reposted in the form of accounting measurements to the users of accounting information i.e., stakeholders.

• Ascertainment of Results of Above Transactions

‘Profit/Loss is a core accounting measurement done and measured by preparing a Profit and Loss Account for a particular period. Various other accounting measurements, such as different types of revenue expenses and revenue incomes are considered for preparing this profit and loss account. Difference between these revenue incomes and revenue expenses is known as the result of business transactions identified as profit/loss. As this measure is used very frequently by stockholders for rational decision making, it has become the objective of accounting. For example, Income Tax Act requires that every business should have an accounting system that can measure taxable income of the business and also explain nature and source of every item reported in Income Tax Return.

• Ascertain the Financial Position of Business

Financial position is another core accounting measurement. Financial position is identified by preparing a statement of ownership meaning Assets, and owing meaning Liabilities of the business as on a certain date. This statement is popularly known as Balance Sheet. Various other accounting measurements, such as different types of assets, and different types of liabilities as existed at a particular date, they are considered for preparing the balance sheet. This statement may be used by various stakeholders for financing and investment decisions.

• To Know the Solvency Position

Balance Sheet, and Profit and Loss Account prepared as above give useful information to stockholders regarding concerns, potential to meet their obligations in the short as well as in the long run.

Function of Accounting The main functions of accounting are as follows:

• Measurement: Accounting measures past performance of a business entity and depicts its current financial position.

• Forecasting: Accounting helps in forecasting future performance and financial position of an enterprise using past data.

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• Decision-Making: Accounting provides relevant information to the users of accounts to aid rational decision-making.

• Comparison & Evaluation: Accounting assesses performance achieved in relation to targets and discloses information regarding accounting policies and contingent liabilities which play an important role in predicting, comparing and evaluating financial results.

• Control: Accounting also identifies weaknesses of the operational system and provides feedbacks regarding effectiveness of measures adopted to check such weaknesses.

• Government Regulation and Taxation: Accounting provides necessary information to the government to exercise control on the entity as well as in collection of tax revenues.

Book-Keeping As defined by Carter, “Book-Keeping is a science as well as art of correctly recording in books of accounts all those business transactions that result in transfer of money or money‘s worth”.

Book-keeping is an activity concerned with recording and classifying financial data related to business operation in order of its occurrence.

Book-keeping is a mechanical task which involves:

• Collection of basic financial information

• Identification of events and transactions with financial character, i.e., economic transactions

• Measurement of economic transactions in terms of money

• Recording of financial effects of economic transactions in order of its occurrence

• Classifying effects of economic transactions

• Preparing organized statement known as Trial Balance

Distinction between Book-Keeping and Accounting

Book-Keeping Accounting

1. Output of book-keeping is an input for accounting. 1. Output of accounting permit informed judgments and decisions by the user of accounting information.

2. Purpose of book-keeping is to keep systematic record of transactions and events of financial character in order of its occurrence.

2. Purpose of accounting is to find results of operating activity of a business and to report its financial strength.

3. Book-keeping is the foundation of accounting. 3. Accounting is considered as a language of business.

4. Book-keeping is carried out by the junior staff. 4. Accounting is done by the senior staff who have skills of analysis and interpretation.

5. Objects of book-keeping is to summarize the cumulative effect of all economic transactions of business for a given period by maintaining permanent record of each business transaction with its evidence and financial effects on accounting variable.

5.Object of accounting is not only book-keeping but also analyzing and interpreting reported financial information for informed decisions.

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Accounting Cycle When complete sequence of accounting procedure is done, which happens frequently,